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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #1378/01 3211723
ZNR UUUUU ZZH
P 171723Z NOV 06 ZDK PER NUM SVCS
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 0840
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1383
RUEHAR/AMEMBASSY ACCRA 1236
RUEHDS/AMEMBASSY ADDIS ABABA 1387
RUEHBY/AMEMBASSQCANBEQA 0648
RUEHDK/AMEMBASSY DAKAR 1013
RUEHKM/AMEMBASSY KAMPALA 1441
RUEHNR/AMEMBASSY NAIROBI 3824
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RUEHRO/AMEMBASSY ROME 1863
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0599
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1604
RUEKJCS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 02 HARARE 001378 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR S. HILL 
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN 
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN 
TREASURY FOR J. RALYEA AND T.RAND 
COMMERCE FOR BECKY ERKUL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ZI
SUBJECT: NO INDICATION OF DOLLARIZATION AS FOREX SCARCITY 
GROWS 
 
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Summary 
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¶1. (SBU) Despite Zimbabwe's hyperinflation and the 
concomitant depreciation of the Zimbabwe dollar, there is no 
indication of a trend toward either de facto or formal 
"dollarization" of the Zimbabwean economy.  According to 
local experts, the biggest obstacle to hard currency 
transactions is an acute lack of foreign currency.  In 
addition, although it remains illegal, the parallel exchange 
market has functioned relatively efficiently and with reduced 
risk over the past year.  The GOZ would likely do everything 
in its power to prevent a trend toward the use of hard 
currency, which would undermine its ability to inflate away 
domestic debt.  End summary. 
 
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Dollarization Not In The Cards - De Facto Or Formal 
--------------------------------------------- ------ 
 
¶2. (SBU)  Hyperinflation continues to erode the value of the 
Zimbabwe dollar.  The local currency is trading at roughly 
Z$1800:1 on the street against the official rate, unchanged 
since July 31, of Z$250:1.  This premium of roughly 
seven-to-one is an all time high.  In addition, many goods 
are priced at the US dollar equivalent and, as predicted, 
"Project Sunrise", the redenomination of the local currency, 
had only a temporary effect on the ease of conducting 
commercial transactions in Zimbabwe dollars.  Large amounts 
of local cash are once more needed for even minor purchases, 
a situation which is likely to continue to worsen. 
 
¶3.  (SBU) In this context, the question has arisen whether de 
facto dollarization could be the natural next step in this 
sharply contracting economy.  We asked four local experts for 
their opinion: economic analyst John Robertson, head of the 
Association of Money Transfer Agencies Fred Mutanda, economic 
consultant Peter Robinson, and Deloitte senior partner 
Tawanda Gumbo.  All four said that dollarization was unlikely 
given Zimbabwe's acute forex scarcity.  Neither exports nor 
remittances were generating enough cash to support 
dollarization.  As a result, cash transactions in hard 
currency were extremely rare. 
 
¶4.  (SBU) The four agreed that the unfavorable official 
exchange rate had depressed exports and had also made the 
Diaspora more and more "creative" in sending support back 
home.  Mutanda said, for instance, that overseas Zimbabweans 
were depositing money into pooled overseas accounts. 
Informal forex dealers in Zimbabwe, or, in some cases, 
licensed MTAs until their recent closure by the Reserve Bank 
of Zimbabwe (RBZ), then paid out the equivalent amount to 
local relatives in Zimbabwe dollars or vouchers for fuel, 
food, etc. at the parallel exchange rate. Closing the circle, 
traders paid the forex dealers in local currency and drew 
down the overseas-held forex to pay for imports. 
 
¶5. (SBU) The IMF Aricle IV report of 2005 estimated a 
baseline scenario of US$1.6 billion worth of imports in 2006. 
 Robertson pointed out, however, that a large portion of the 
 
HARARE 00001378  002 OF 002 
 
 
payments for this trade was nowhere officially captured, 
rendering the country,s balance of payments and trade 
statistics "totally confusing and nonsensical."  Along with 
Gumbo of Deloitte, which is the auditor of the RBZ, he 
professed "no idea" of the amount of forex actually 
circulating in the country. 
 
¶6. (SBU) Robinson commented to the Ambassador on November 16 
that as long as the RBZ provided sufficient local currency, 
continued to prohibit US dollar transactions (officially, at 
least), and continued to compel big business to bank in the 
official sector, "there,ll be no dollarization."  He added 
that an infusion of "big bucks" could certainly stabilize the 
foreign exchange market; on the other hand, if the RBZ 
established its credibility in managing foreign exchange 
policy, it could stabilize the market without the backing of 
US dollar cash. 
 
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Parallel Market Helping Economy Function 
---------------------------------------- 
 
¶7.  (SBU) Our contacts also pointed to the parallel market as 
a reason why dollarization was unlikely.  Although the market 
remains "illegal," it is thriving.  In fact, the government 
is not only tolerating its existence, it has become the main 
player in the market.  The (RBZ) routinely purchases hard 
currency on the parallel market.  In fact, the local currency 
it prints for this purpose is a major source of inflation. 
In addition, the RBZ purchases have contributed to the high 
demand for forex which recently outstripped supply and 
quickened the pace of depreciation. 
 
¶8. (SBU) Government involvement in the parallel market may 
have reduced the risk of prosecution, but it has not ended it 
entirely.  Moreover, the GOZ's propensity for command and 
control economics means that it is unlikely to legalize such 
transactions.  As a result, although the market is operating 
relatively efficiently and facilitating commercial 
transactions, traders are charging a risk premium to 
individuals and businesses active in the market. 
 
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Comment 
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¶9.  (SBU) Every indication is that hard currency cash is 
simply in too short supply to support dollarization.  As the 
exporting sector shrinks, we expect to see the supply dry up 
further and to see remittances channeled in ever more 
creative ways to finance imports and local purchases.  In 
addition, the GOZ can be expected to bitterly resist 
dollarization, which would curtail its ability to manipulate 
monetary policy to, for instance, inflate away domestic debt. 
 
DELL